Clear Eyed Capitalist

Archive for April, 2007

This quarter at BGI our one varying elective is a class on energy systems. I assumed it would be a study on renewable energy and certainly it is, but what I’m learning most so far is what a tiny fraction of global energy is provided by renewables now, and how little that’s expected to change.

So where’s the juice? Well, our most abundant energy supply is indeed The Sun. It’s collection, conversion, storage and distribution that stump us. For other energy sources, location, extraction, transportation and use also come into play. Solar energy is what gives us tidal energy and wind energy. Old solar energy is what gives us fossil fuels.

In looking at fossil fuels, many assessments of sources focus on a Reserve/Production ratio which gives a sense of how much of the source is left. Our book (Energy Studies by Shepherd & Shepherd), published in 2003, sums up that we have about 40 years of oil left, planet-wide. What we do have lots of, to my surprise, is coal. Coal is likely to last us another 200 years, and is widely available geographically. Over the last 30 years many countries (like the UK) have shifted from coal to natural gas because of pollution issues. Coal is what generates acid rain and international disputes because the rain rarely falls where the pollution is generated. Coal plant technology has improved over that time: smokestacks now include limestone “scrubbers” that interact with Sulfur Oxide and keep it out of the air, but it’s still one of our most polluting energy sources (depending on how you want to stack it up against nuclear waste). Thus the emerging “clean coal” industry, trying to figure out how we can hang on to this abundant energy supply w/o poisoning ourselves or compromising so much of our planet’s surface getting at it.

Most electricity is generated from coal-fired plants, which generate anywhere from 200 MhW to 500 MhW. In the US 2004 about half our power was generated that way. The other half was natural gas and nuclear about equally, then hydro at about half of those. “Other Renewables”, listed as “Wood, black liquor, other wood waste, biogenic municipal solid waste, landfill gas, sludge waste, agriculture byproducts, other biomass, geothermal, solar thermal, photovoltaic energy and wind” accounted for just 2% of the total US electricity generation. That’s a bit of an eye-opener for someone who lives in Eco-topia, aka The Pacific Northwest. My local utility, Puget Sound Energy (PSE) gets 42% of its energy from Hydro, and is about to go after Wind in a big way. I suppose I shouldn’t be that surprised, I’ve watched Kilowatt Ours – a documentary about the coal industry and electricity use in the southeast US.

That movie and our textbook emphasize another oft-under-mentioned energy source: conservation. We live in an infrastructure that was built on an assumption of energy abundance, as capital investments depreciate there are many improvements to be made, but the kicker is we’re waiting for the depreciation to do it. I’m personally due – we’re about to replace our 10+ yr old clothes washer. Friends said they were able to drop from 16 gallons of water/load to about 2.5, and drying is shorter now because the clothes aren’t as wet when they come out of the washer. PSE includes conservation in their energy planning.

As an investor, wind gets a lot of air, but I’m getting skeptical. A guest speaker at BGI asserted that most of the good wind sites are now taken, though a Canadian student begged to differ, there are some good sites on Vancouver Island that need to overcome political resistance. Like the highly contested Cape Wind project off the coast of Massachusetts. I’ve also heard rumors that all the commercial wind turbines expected to be produced in the next 5-7 years are spoken for, and it will take time to build new plant capacity. My biggest concern about wind came up when I learned that consultants usually do multiple years of wind studies on a site before deciding where to put turbines. How fixed are wind patterns in an era of climate change? I’ve seen one new innovation that seemed to have potential – a company working to actually store wind power. Currently the biggest recognized drawback to wind is availability – you get power when you get it, not necessarily when you want it. Folks talk about “backing” wind power with something more on-demand like hydro. You can’t go “all wind”, you need the on-demand power source to fill the gaps and meet demand. If this company figures out how to store it, that will be a big boost for the industry, assuming I’m wrong about climate change and wind patterns. I’m the only one who seems to worry about it, but I was also the only one in high school physics who decided that if moving electricity creates a magnetic field, and changing magnetic fields can generate a current, maybe we should think harder about electric blankets.

Why did I start a blog? As someone coming out of high tech, there’s an element of feeling that if I don’t exist in cyberspace, I don’t exist. As someone who believes we have an economy and social system with some growing problems, I’m choosing Voice over Exit. In my journey to figure out what’s wrong and how do we fix it, this blog helps me in three key ways:

1) clarifying my own thinking I can write all the rants I want in my journal, but posting it where someone might actually read it requires I work to construct balanced arguments and think through potential criticisms.
2) building relationships I’m seeking fellow travelers. Having a blog accelerates that process – if you have no interest in what I’m talking about or think I’m fringe, then let’s not waste our time. If you have a suggestion for me on something else I should read or someone I should talk to: email me! Do you have a response – email me! If something I’ve written seems inaccurate or inappropriate, email me! I’m betting you have my address because that’s the only way I advertise this blog – in my email signature, so people can quickly figure out who I am, what I’m about and whether or not we should come together. I have comments turned off because the only comments I ever got were from spammers saying “nice post! Check out my site at http://www.BuyMyThing.com” or some such and I got tired of deleting them.
3) Marking progress & holding integrity I’m working and thinking hard but sometimes it can feel like I’m not getting anywhere. The blog is a way of keeping me on track – each post codifies an understanding I’ve come to. Making publicly-findable (if you’re looking) statements about what I really believe it keeps me from muting what I really think so someone with money or connections will accept me. It helps me stay authentic. Though I’m ashamed to admit I don’t write as much about my social justice thinkings as I would like because it does feel too fringe for the capital market focus I’ve taken. Perhaps I’ll work on that.

Bottom Line: this blog about my own thinking. As you might hope or expect, I allow my thinking to be influenced by the thinking, public speaking & writing of others. If it leads me to new (at least to me) insight, I will write about the insight, and where it came from. I try to balance appropriate attribution to others with respect for confidentiality. It is not my goal to be a reporter or columnist: I make no effort to publish on a regular schedule, I don’t publish everything I write, and I don’t advertise for readership. I’m not interested in gossip or name-dropping, I do not make any money off this blog (-yet, I’m thinking as a good business person I should add an Amazon affiliate page with my own book recommendations, but that would assume I get enough readers to bother) and I choose all the content myself.

What did I do for my spring break? Attend a conference on community development venture capital, participate in a student competition, and help out at a conference on business incubation. A veritable mini-quarter!

The Sustainable Venture Capital Investment Competition was intensely fun. It was so satisfying to do due diligence in a compressed period with a team of committed partners. We pulled an actual all-nighter. Literally we went back to the hotel at 8 am and I slept for 1 hour before getting back up to be back at the competition by noon. Besides that, it was a little unlike real life in that we reviewed business plans first, did research, then saw the pitch and then later had 15 minutes with the Entrepreneur. I’ve raised the issue with my angel groups that I’d like to see business plans before I see entrepreneurs, so I can actually ask intelligent questions when I see them. However that’s not the way it’s done, in part because angel groups need investors in the room to make it worth the entrepreneur’s while, and so if it’s not a surprise, investors might decide not to show up.

I’ve also learned in the last couple weeks that by far a VCs most valuable and constricted resource is time. It makes sense that the most effective use of time is to screen pitches, and then get into the business plan of those that pique interest off the pitch, and then meet with the entrepreneur for deep Q&A. That’s the argument for why VCs ask for no-shop agreements – because they can’t afford to invest the due-diligence time and have a good investment get a competing offer.

There were eight teams (Berkeley, Michigan, Duke, Harvard, Wharton, UNC, somebody else traditional, and us). Michigan won Entrepreneur’s Choice, I think Wharton and Berkeley won. It was a little confusing because they give us all fake team names to hide the school identities from the judges. Given that, well, one of these schools is not like the others, it’s a little flattering that the organizer commented that when the judges were trying to guess which team was from which school they did a pretty poor job. After winners were announced they had an excellent setup where we rotated from judge to judge for specific feedback. Our major fall-downs: we failed to game the rules correctly – the judges were to grade us on team work – we chose to have a single (rotating) leader for each session, but each session had different judges, so to each set of judges we seemed to have one dominant member and little team interaction. So it’s a learning for us about this competition.

The second failing was in working to build rapport with the entrepreneur. That I chalk up to genuine learning – we had four sessions and in each session we steadily moved the valuation questions closer to the end of our 15 minute sessions and I think we really improved just over the day. It’s also a pitfall from my angel experience where entrepreneurs often walk into the room with a term sheet drafted, and I’ve yet to be a big enough piece of the pie to have negotiating power (or the confidence to try and get it -but I’m getting there!) We actually had to draft a term sheet, and I did that part. This was a perfect experience for me because negotiating about valuation and proposing term sheets is right where I’ve been wanting to dare to go, and this pushed me into it. So that’s another reason I was perhaps a little too aggressive about tackling valuation immediately in our entrepreneur interviews, I was geared up. Finally, as a team we agreed that being from the “sustainable” school, we probably overcompensate to avoid being perceived as insufficiently concerned about the numbers.

Other feedback in my mind amounted to failures to correctly game expectations – the judges wanted more finance and less on our social metric, and didn’t care about why we didn’t invest in the other companies.

Our big disappointment – we worked really hard to come up with a quantitative measurement of the social value potentially created by these companies. We came up with our own GreenToGold Ratio TM (Green-To-Gold was our assigned fake team name, and we TM’d our invented ratio as we imagine good business students should do.). We are pretty proud of the ratio. Two of my team members actually work for socially responsible investment companies (Trillium Asset Management and Progressive Investment Management) so we’re all intimately aware that the current state-of-the-art in the industry is the struggle to quantitatively measure social return. It’s particularly tricky in equity. To us, this was the entire point of this competition – it’s the Sustainable VCIC, as opposed to the regular VCIC competition which has its finals on April 12th at UNC. But the judges didn’t ask about our metric at all. Which also meant those team members didn’t do any talking during the Q&A part of our presentation.

However, a few days later comes redemption – one of the judges who works for a socially responsible fund scheduled a conference call to follow-up with us and talk about our metric as we were the only team to put a bunch of effort into designing one. All-in-all, I can’t imagine a better spring break.

A shameless plug, for those few of you who may not yet know that BGI is (in some ways) the greatest thing since carbon footprinting. (And if you don’t know what that is…you’d better look it up.)

Bainbridge Graduate Institute is in the news again! This article about BGI from the Global Intelligencer gives a nice sense of who we are.

In other news: BGI students win Royal Society of Arts contest in ways to reduce the distance food travels on the way to market. Three of them are inducted as fellows of the Royal Society, placing them in a select group whose former members include Charles Dickens, Benjamin Franklin, Adam Smith and Karl Marx. [SM- I’ll futher shamelessly plug that they credited me in their student presentation to the school for helping with their idea. But ahh, as we know in business there are ideas and there’s execution, so we all know where the true credit is due.]

BGI now has 144 students, up from 94 last year and 54 the year before.

The Net Impact Student Guide to Graduate Programs rates BGI #1. In addition to being #1 overall, BGI was #1 in preparation for ethical and socially responsible leadership, #1 in environmental sustainability, #1 in corporate social responsibility, #1 in community development and #1 in student helpfulness.